Harvey’s announcement comes a week after he announced a $10 million settlement with Merrill Lynch over the same transactions – specifically, in Merrill’s case, in not properly supervising the misbehaving advisors (See Garden State AG Settles Merrill Market Timing Charges ).
In both cases, the allegations are that the three advisors carried out the improper trading when hedge fund Millennium Partners, L.P., was their primary client from 2000 though 2003, while they were employed first by UBS PaineWebber Inc., then Merrill Lynch. Tuesday’s complaint seeks civil monetary penalties from the three:
- Christopher Chung of Edgewater
- Kevin Brunnock of Fort Lee
- William Savino of Fort Lee.
Harvey also revoked their registration to trade securities as broker-dealer agents in New Jersey.
According to Harvey’s announcement, the three financial advisors, known as the “CBS Group,” devised a variety of “fraudulent schemes” to conduct their trading on behalf of Millennium.
“These three financial advisors cheated small investors to benefit their large corporate client and to enrich themselves,” said Harvey, in the announcement. “They market timed mutual funds that were intended to provide relatively stable, long-term investments for ordinary people planning for their retirement or their children’s college tuition. Most mutual funds prohibit market timing, because it siphons off short-term profits and makes funds more volatile. However, these financial advisors devised scheme after scheme to hide their conduct and defraud mutual funds and fund investors.”
Market Timing: The Numbers
Harvey charged that after the three were hired by Merrill Lynch in January 2002, supervisors warned them that they were violating the firm’s policies against market timing. However, the three continued to market time until they were fired in October 2003. The group’s market timing for Millennium was a significant reason why the Paramus Complex of Merrill Lynch, which includes the Fort Lee office where the three worked, was ranked Number 1 in the country for revenues for the firm in the first quarter of 2002, Harvey alleged. Between January and April 2002, the three placed more than 3,700 trades on behalf of Millennium, many of which were held for less than five business days, the official charged.
The group hid its mutual fund trading activity by what Chung proudly called “deviancy at its best” in one recorded phone call that is transcribed for the complaint filed Tuesday, Harvey said.
Harvey‘s announcement said that in about one year of
trading for Millennium at UBS Paine Webber, the three
placed 12,953 trades in more than 350 mutual funds.
Millennium made profits in at least 243 of those funds.
In those funds where Millennium made profits, its gains
totaled about $25 million.
While at UBS Paine Webber, the three also placed trades in at least 31 mutual fund sub-accounts, through at least 15 variable annuity contracts. In at least 27 of the sub-accounts, Millennium made profits, which totaled about $4.5 million.
At Merrill Lynch, the three financial advisors and a fourth who was involved to a lesser degree, placed 12,457 trades for Millennium in at least 521 mutual funds and 63 mutual fund sub-accounts of at least 40 variable annuities. Millennium made profits in over half of the funds and fund sub-accounts. In those funds where Millennium made profits, its gains totaled about $60 million, Harvey said.
Harvey charged that the three advisors:
- offered mutual fund companies sticky assets in exchange for market timing capacity in other funds
- used multiple accounts in different names for the same client to split up trades and “fly under the radar” of the mutual funds
- deceptively transferred investments in funds from accounts at the investment firm to accounts at the mutual fund companies, then back to the investment firm to different accounts, in order to avoid fees and detection of market timing.